The sexual favors, whistleblower intimidation, and routine fraud behind the fiasco that has triggered the global financial crisis

It may seem like ancient history now, but not long ago the mortgage industry was turning ordinary people into millionaires. One of them was Sharmen Lane, a high school dropout who, like many other young women during the boom, found her way into an obscure banking job with the clunky title "mortgage wholesaler." Her experience—and the experiences of other wholesalers like her—offers a glimpse into the recklessness and indulgence that drove the industry to ruin.

The rise of mortgage wholesalers from grunts to rainmakers is one of the more curious developments of the housing bubble. Wholesalers work for banks and other lenders. The wholesaler's job is to buy loan applications from independent mortgage brokers so that lenders can turn them into loans. Wholesalers are paid on commission: the more loans they generate, the more money they make. During the housing boom, lenders typically approved the loans and then packaged them into securities. That path—from mortgage brokers to wholesalers to lenders to securities—turned out to be a road to disaster.

But as the housing bubble inflated, wholesalers—though hidden from public view—became high-earning superstars. Lane, a manicurist before joining now-defunct subprime lender New Century Mortgage in 1997, says she brought home $1 million in 2002 and $1.2 million in 2003.

Eventually the deal-making turned frenetic. Multiple wholesalers began inundating mortgage brokers with offers for the same applications. Some brokers chose to exercise their power by asking for something extra in exchange for their business: sex.

Dozens of former brokers and wholesalers say the trading of sexual favors was so common that it came to be expected. Lane recalls one visit to a mortgage brokerage near San Jose (Calif.) in which the manager lewdly propositioned her in his office. She says she declined the advance, and he didn't sell her any applications. But other female wholesalers didn't have the same qualms about crossing the line. "Women who had sex for loans were known very quickly," says Lane, who left New Century before it failed in 2007 and now works as a $200-an-hour life coach and motivational speaker in New York. "I didn't want to be a mortgage slut."

WHOLESALE CORRUPTION

Investment bubbles always spawn excesses, and housing was no exception. The abuses went far beyond sexual dalliances. Court documents and interviews with scores of industry players suggest that wholesalers also offered bribes to fellow employees, fabricated documents, and coached brokers on how to break the rules. And they weren't alone. Brokers, who work directly with borrowers, altered and shredded documents. Underwriters, the bank employees who actually approve mortgage loans, also skirted boundaries, demanding secret payments from wholesalers to green-light loans they knew to be fraudulent. Some employees who reported misdeeds were harassed or fired. Federal and state prosecutors are picking through the industry's wreckage in search of criminal activity.

Now wholesalers, who for a brief moment rose to prominence, are an endangered species. The failures of large subprime lenders like New Century, BNC (a unit of Lehman Brothers), and GreenPoint Mortgage, owned by Capital One, threw thousands out of work. Some lenders still in business have curtailed or shuttered their wholesale operations.

In the end, the wholesalers were undone by the same people who allowed for their rise: their Wall Street overlords. During the boom investment banks bought as many loans as they could to pool together and turn into securities. In 2006 the top 10 investment banks, which included Merrill Lynch (MER), Bear Stearns (BSC), and Lehman Brothers, sold mortgage-backed securities worth $1.5 trillion, up from $245 billion in 2000. To keep the supply of loans coming, the investment banks increasingly took control of the industry's frontline players as well.

First they started buying small, independent wholesaling firms. Next they extended billions in credit to subprime lenders. Then they took stakes in some, and bought others outright. At the height of the frenzy in 2006, six top investment banks shelled out a total of $2.2 billion to buy subprime shops.

That gave Wall Street the power to demand more subprime loans, which carried the highest interest rates and were the most profitable. As a national account director for Deutsche Bank (DB), Mark D. Toomey bought loans from mortgage lenders to turn into securities. Sometimes, he says, he "twisted arms" to get more loans. "Nobody had the [guts] to say no," says Toomey, who left the bank in 2007. Deutsche Bank declined to comment.

But mostly, brokers and wholesalers were happy to comply. The more loans they made, after all, the more they got paid. One former wholesaler in Northern California who requested anonymity joined subprime lender GreenPoint Mortgage in 1997, right out of college. By 2004, she says, she was pulling in several hundred thousand dollars a year. She kept a chauffeur on call to shuttle her and her friends to "exclusive clubs, restaurants, and parties," and treated friends to shopping sprees at Neiman Marcus, Gucci, and Louis Vuitton. "It was the time of our lives," says the woman, who now works as an account executive for another lender in the area.

Brokers say some female wholesalers weren't up on the finer points of finance—but exploited other assets in their quest for more loans. "You had boiler rooms of younger, predominantly male brokerage operations and in would walk a gorgeous, fit [wholesaler] who would go desk to desk," says Rick Arvielo, president of New American Funding, a mortgage brokerage in Irvine, Calif. "Most of them didn't know the product."

Of course, it's accepted practice in many industries for companies to hire attractive saleswomen. What's more, on Wall Street, lurid tales of erotic dancers livening up after-hours events are common.

"INDECENT PROPOSALS"

But in the mortgage business, it went further: The women allegedly offering sexual favors were bank employees. Evan Stone, president of Walnut Creek (Calif.) mortgage brokerage Pacific Union Financial, says "minimally trained and minimally dressed" wholesalers often wooed brokers. He says he regularly got visits in his suburban office from representatives wearing unusually short skirts to entice him and his team of brokers to party at the local Ruth's Chris Steak House. Stone says one New Century wholesaler offered to fly him to Chicago to "have a good time." He says he declined all offers of sexual favors. "There were some indecent proposals made," he says. "That was part of building the relationship."

Wholesalers also offered sexual favors to co-workers. To drive up their commissions, some enticed loan underwriters at their companies to approve questionable applications. A vice-president at Washington Mutual who once wielded $500 million to make loans recalls an incident in which a female wholesaler wanted him to approve a loan that didn't fit guidelines. The manager, who requested anonymity, says the co-worker, wearing a low-cut shirt, knelt down at his desk and said: "I really need this. What do I have to do?"

Some wholesalers turned a blind eye to broker fraud, too. "I'd walk into mortgage shops and see brokers openly cutting and pasting income documents and pay stubs, getting out the Wite-Out and changing Social Security numbers," says Melissa Hernandez, a former wholesaler for Argent Mortgage, a unit of now-defunct Ameriquest Mortgage, who says she never knowingly bought bogus applications. "There was no ambiguity."

Other wholesalers took matters into their own hands, doctoring documents to qualify borrowers for loans. A former Wells Fargo (WFC) wholesaler says he regularly used the copiers at a nearby Kinko's to alter borrowers' pay stubs and bank account statements.

He would embellish job titles—turning a gardener, for instance, into the owner of a landscaping company—and inflate salaries. "I knew how to work the system," the former wholesaler says. Wells Fargo spokesman Kevin M. Waetke says the bank "does not condone any misrepresentations in the loan-underwriting process. We thoroughly investigate any incident that comes to our attention. Where necessary, we will take the appropriate disciplinary action."

Employees who resisted making bad loans ran the risk of being penalized. Shortly after Rachel Steinmetz joined GreenPoint's Manhattan branch as a senior underwriter in September 2005, wholesalers at the bank started asking her to approve loans "under terms that the borrower did not qualify for," according to a wrongful termination suit filed in June by Steinmetz in New York federal court. She says she told her superiors that the applications contained suspect details and that the loan files didn't have enough paperwork to back up borrowers' claims. "Notwithstanding [her] concerns, management overrode her decisions" and approved the loans anyway, the complaint says.

In April 2006, Steinmetz claims, she rejected a loan application that inflated the borrower's income and the home's appraisal value. While Steinmetz was out of the office celebrating Passover, she says in the complaint, her superiors signed off on the loan. A month later, Steinmetz says, her boss asked her to compile the paperwork on the same loan in preparation for closing. "Although she protested," the complaint notes, "the loan was funded in her name."

Steinmetz says through her attorney that there was retribution for her reluctance to make bad loans. Even though her bosses knew she was devoutly religious, the complaint says, they often would inundate her with "additional work and unnecessary meetings" on the eve of the Sabbath and religious holidays. In May 2006, she says, her superiors nixed her bonus even though she made her loan quota. Steinmetz is now suing Capital One (COF), which bought GreenPoint Mortgage in 2006 and shut it down less than a year later, for $10 million in damages. "We believe these claims are without merit, and we are confident that we will prevail in this litigation," says Capital One spokeswoman Diana Don.

DEMANDING "SPIFFS"

Whistleblowers at other firms complain of similar treatment. Coleen Colombo joined the Concord (Calif.) branch of BNC in 2003. The small office, next to a Mercedes-Benz dealership and a run-down Kmart (SHLD), was part of a regional group that funded some $1.2 billion of loans a month. Colombo initially thrived in her job as a senior underwriter. In a performance review, she received a top rating of "exceeds expectations," according to a wrongful termination and harassment suit filed in California Superior Court on behalf of Colombo and five other female employees.

The environment turned hostile in 2005, the suit says. One fellow employee, a male wholesaler, began bringing Colombo questionable loans with incorrect salaries, occupations, and home values, she says. In one instance, she claims in the suit, the wholesaler "tried to bribe [Colombo] to allow a loan with fraudulent information to go through."

The bribes, known as spiffs, were common at the BNC branch, says Sylvia Vega-Sutfin, a former wholesaler who left the firm in 2005. The mother of four, who says she made $16,000 a month during the boom, says that some underwriters demanded spiffs of $1,000 for the first 10 loans and $2,500 for the next 20 loans, whether they approved the mortgages or not. When she refused to pay them, Vega-Sutfin says, her loan files started to go missing and the size of her commission checks plummeted. Her bosses "said they would make an example of me to others: 'If you complain, this is what will happen,' " she says.

Colombo says in the suit that she e-mailed the regional vice-president for operations to report the wholesaler who tried to bribe her. She claims the vice-president brushed off her complaints in a meeting. Colombo "left the office in tears," the suit says. After she returned from a short leave of absence, the branch manager told her a co-worker "wanted her terminated for making the complaints," Colombo claims.

Meanwhile, the wholesaler who tried to bribe Colombo started sexually harassing her, according to the suit. The male colleague made her feel "uncomfortable and fearful" by "intentionally rubbing his body against hers." Colombo resigned from BNC in 2005. "You would have thought he was the pimp and we were his prostitutes," says Linda Weekes, another underwriter who is part of the suit. "It felt like a dirty, sleazy place to work." The case has been on hold since its owner, Lehman Brothers, filed for bankruptcy on Sept. 15. "We dispute the allegations made by these former employees and will be contesting them on the merits in the pending litigation," says a Lehman spokesman.

The world came crashing down for wholesalers in late 2006, when subprime loans started going bad. Wall Street quickly reined in its mortgage factories, tightening lending standards, pulling credit lines, and forcing lenders to buy back the same risky loans it once voraciously consumed. For the thousands of wholesalers swept up in the excitement and excess of a manic market, it was time to find a new job.

FOREVER BRUCE LEE

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